What is your strategy for the construction equipment and related fixed assets that you currently use and plan to use for the next couple of years? Will you buy new? Buy used? Buy reconditioned? Recondition what you already own? Or rent?
It’s an interesting set of choices. I bet you never thought you had this many options to consider when it comes to the tools of your trade.
You also have to consider the new tax reform legislation. It can be great for contractors, but it also adds a lot to the confusion associated with the choices noted above.
In terms of equipment, especially new units, the market is tight with lead times closer to next year than this year. Even if you can justify owning a new unit, you may not get it in time to do you much good in 2018.
If you do happen to get one delivered in this calendar year, it will probably be 100% deductible against 2018 taxable income. Just make sure you understand your 2018 tax position. You don’t want to run out and take on a pile of debt and then find out the additional cash flow you were anticipating is lower than expected or not there at all.
With the new equipment market tight, you can expect used equipment prices to be strong, as well. That said, used equipment also has more benefits this year. The cost is lower, debt service is lower, your techs can fit it to last a while and, thanks to tax reform, you get bonus depreciation for used units — thus, providing a 100% deduction should you need it. But the same words of caution noted above apply here.
Advantages of Rebuilds
The new game in town has manufacturers taking in core units and rebuilding them to offer a zero time meter and a warranty. In other words, you can buy a 10-year-old machine and finance it the same as new because it essentially is a new unit. Plus, you get the bonus depreciation and at least a 60-month note.
Rebuilt equipment will cost more than a used unit but can be between 60% to 70% of new price. The only problem you will have is convincing your bank or equipment valuation firm that this is not your typical 10- to 12-year-old machine.
Rebuilds are a great concept that is good for both the manufacturer and the customer. If dealers get the service and parts sales that go along with the warranty, they may end up liking the program, as well.
Another option is reconditioning what you already own, assuming you have the techs and know-how to get it done. Given the improved quality of machines, you may find that the cost to rebuild a unit is far less than all the other options discussed so far, while still providing the utility value you need. A rebuild may not last as long as a new or reconditioned unit, but the cost differential will be huge.
Repairing existing units is also a consideration. The tough part is financing the repair cost; it probably can’t be done. But if you can fix it on Monday and get it billable on Wednesday, you will most likely avoid getting too far behind on your cash flow. Get the timing right and it should work out for you. Be sure to expense the repairs whether you capitalize them or not.
Relying on Rental
If you wish to avoid such mental gymnastics, you can rent what you need when you need it and leave the decisions and problems with the rental company.
Become associated with a rental company that carries the type of equipment you use, get to know the managers and your rental coordinator and pay them on time. I bet you will find yourself in a favorable position as far as that rental company is concerned.
Yet, as we all know, even this can’t guarantee a rental company will have what you need whenever you need it. This means you better have a second phone number you can call if this occurs.
Proceed with Tax-related Caution
It’s likely most of you will wind up with a mix of new, used, reconditioned, repaired and rented units. No matter what you do, the “tax gods” are lined up in your favor — assuming you’re in a situation where you can take advantage of tax reform to a level where you see meaningful additional cash flow coming your way.
A lot of tax laws have changed going both ways. Again, let me caution you that this is the year where you really must get with your tax person to see how 2018 will work out. Do not assume you will have no tax to pay on 2018 income. Consult with those in the know to find out and make sure.